Financing Noncurrent Assets Bates Corporation is interested in adding to its production facilities and has identified two major routes to follow. Under the first alternative. Bates would acquire the use of additional building space by signing a seven-year lease, which would be treated as an operating lease. Bates Corporation would make annual payments of $298,036 at the end of each year. An implicit interest rate of 9 percent is included in the lease computations.

Under the second alternative, Bates would purchase a building for $1,500,000 by borrowing that amount on a 7-year note requiring equal payments of $298,036 at the end of each year for 7 years. For depreciation purposes, the building has an expected life of twenty-five years and residual value of

$300.000. Straight-line depreciation would be used.

a. Prepare a schedule showing the computation of interest expense over the 7-year term of the note if the second alternative is chosen and the note includes 9 percent implicit interest.

b. Determine the annual cost of the additional facilities in years | through 3 under the two alternatives.

c. Which alternative should Bates select? Explain why.